**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                        | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                              |                                                                                          |
| **For the quarterly period ended June 30,  2003** |
|                                              |
| **OR**                                            |
|                                              |
| **o**                                             | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number 001-16047**

 

**Advanced Power Technology, Inc.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                     |   | **93-0875072**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other Jurisdiction  of  Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |

 

**405 SW Columbia Street, Bend, Oregon  97702**

(Address of principal executive offices and Zip Code)

 

**(541) 382-8028**

(Registrant’s telephone number)

 

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to the filing requirements for the past 90 days.  Yes ý    No o

 

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes o  No ý

 

 

The number of shares of theRegistrant’s Common Stock outstanding as of July 31, 2003 was 10,412,007shares.

 

 

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

** **
| **Part I**  | **Financial Information** |
|-------------|---------------------------|
|        |                      |   |
|        | Item  1.                  | Financial  Statements: |
|        |                      |   |
|        |                      | Consolidated Balance Sheets as of June 30,  2003 and December 31, 2002 |
|        |                      |   |
|        |                      | Consolidated Statements of Operations for  the three and six months ended June 30, 2003 and 2002 |
|        |                      |   |
|        |                      | Consolidated Statements of Cash Flows for the  six months ended June 30, 2003 and 2002 |
|        |                      |   |
|        |                      | Notes to Consolidated Financial Statements |
|        |                      |   |
|        | Item  2.                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|        |                      |   |
|        | Item  3.                  | Quantitative  and Qualitative Disclosure About Market Risk |
|        |                      |   |
|        | Item  4.                  | Controls  and Procedures |
|        |                      |   |
| **Part II** | **Other Information**     |
|        |                      |   |
|        | Item  1.                  | Legal  Proceedings |
|        |                      |   |
|        | Item  6.                  | Exhibits  and Reports on Form 8-K |
|        |                      |   |
|        |                      | Signature |
|        |                      |   |
|        |                      | Certifications |
|        |                      |   |
|        |                      | Exhibits |

 

2

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**ITEM1. FINAN****CIAL STATEMENTS**

 

**ADVANCEDPOWER TECHNOLOGY, INC.**

**CONSOLIDATED BALAN****CE SHEETS**

** (In thousands, except share amounts)**

 
|                                                                                                                                                                                          |   | **June 30,  2003** |       | **December  31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                                                                                                          |   | **(unaudited)**    |       |                    |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| **Assets**                                                                                                                                                                                    |   |               | ** ** |                    | ** ** |
| Current assets:                                                                                                                                                                               |   |               |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                     |   | $                  | 10,884     |                    | $          | 6,708 |   |
| Short-term investments in available-for-sale  securities                                                                                                                                      |   | 6,751              |       | 10,452                  |       |
| Accounts receivable, net of allowance of  $222 (2003) and $70 (2002)                                                                                                                          |   | 7,375              |       | 6,899                   |       |
| Inventories, net                                                                                                                                                                              |   | 12,699             |       | 11,949                  |       |
| Prepaid expenses and other current assets                                                                                                                                                     |   | 2,359              |       | 2,521                   |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Total current assets                                                                                                                                                                          |   | 40,068             |       | 38,529                  |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Property and equipment, net of accumulated  amortization and depreciation of $12,961 (2003) and $11,410 (2002)                                                                                |   | 10,084             |       | 10,617                  |       |
| Long-term investments in available-for-sale  securities                                                                                                                                       |   | 1,000              |       | 2,000                   |       |
| Other assets                                                                                                                                                                                  |   | 111                |       | 109                     |       |
| Technology rights, net of accumulated  amortization of $1,415 (2003) and $876 (2002)                                                                                                          |   | 9,349              |       | 9,887                   |       |
| Goodwill                                                                                                                                                                                      |   | 15,570             |       | 15,806                  |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Total assets                                                                                                                                                                                  |   | $                  | 76,182     |                    | $          | 76,948 |   |
|                                                                                                                                                                                          |   |               |       |                    |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                 |   |               |       |                    |       |
| Current liabilities:                                                                                                                                                                          |   |               |       |                    |       |
| Accounts payable                                                                                                                                                                              |   | $                  | 3,416      |                    | $          | 2,873 |   |
| Accrued expenses                                                                                                                                                                              |   | 2,128              |       | 2,475                   |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Total current liabilities                                                                                                                                                                     |   | 5,544              |       | 5,348                   |       |
| Other long term liabilities                                                                                                                                                                   |   | 418                |       | 428                     |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Total liabilities                                                                                                                                                                             |   | 5,962              |       | 5,776                   |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Stockholders’ equity:                                                                                                                                                                    |   |               |       |                    |       |
| Preferred stock, par value $.001, 1,000,000  shares authorized; no shares issued and outstanding                                                                                              |   | —             |       | —                  |       |
| Common stock, par value $.01, 19,000,000  shares authorized; 10,515,207 issued and 10,406,350 shares outstanding in  2003; 10,503,219 shares issued and 10,394,362 shares outstanding in 2002 |   | 105                |       | 105                     |       |
| Additional paid-in capital                                                                                                                                                                    |   | 88,507             |       | 88,490                  |       |
| Treasury stock, at cost, 108,857 shares                                                                                                                                                       |   | (1,700             | )          | (1,700                  | )          |
| Deferred stock compensation                                                                                                                                                                   |   | (84                | )          | (171                    | )          |
| Accumulated other comprehensive income                                                                                                                                                        |   | 238                |       | 166                     |       |
| Accumulated deficit                                                                                                                                                                           |   | (16,846            | )          | (15,718                 | )          |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Total stockholders’ equity                                                                                                                                                               |   | 70,220             |       | 71,172                  |       |
|                                                                                                                                                                                          |   |               |       |                    |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |   | $                  | 76,182     |                    | $          | 76,948 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**ADVANCED POWERTECHNOLOGY, INC.**

**CONSOLIDATED STATE****MENTS OFOPERATIONS**

** (In thousands, except per share amounts)**

**(Unaudited)**

** **
|                                                                              |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                              |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Revenues, net                                                                     |   | $                                 | 12,487 |                            | $      | 10,694 |   | $ | 23,646 |   | $ | 18,933 |   |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Cost of goods sold                                                                |   | 7,777                             |   | 7,074                           |   | 15,529 |   | 12,686 |   |
| Amortization of technology rights and other  charges                              |   | 280                               |   | 565                             |   | 564 |   | 957 |   |
| Total cost of goods sold                                                          |   | 8,057                             |   | 7,639                           |   | 16,093 |   | 13,643 |   |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Gross profit                                                                      |   | 4,430                             |   | 3,055                           |   | 7,553 |   | 5,290 |   |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Operating expenses:                                                               |   |                              |   |                            |   |   |   |   |   |
| Research and development                                                          |   | 668                               |   | 960                             |   | 1,501 |   | 1,981 |   |
| Selling, general and administrative                                               |   | 3,703                             |   | 3,023                           |   | 7,634 |   | 5,533 |   |
| In-process research and development                                               |   | —                            |   | 211                             |   | — |   | 2,108 |   |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Total operating expenses                                                          |   | 4,371                             |   | 4,194                           |   | 9,135 |   | 9,622 |   |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Income (loss) from operations                                                     |   | 59                                |   | (1,139                          | )      | (1,582 | ) | (4,332 | ) |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Interest income, net                                                              |   | 52                                |   | 162                             |   | 108 |   | 381 |   |
| Other expense, net                                                                |   | (145                              | )      | (48                             | )      | (134 | ) | (9 | ) |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Loss before income tax expense (benefit)                                          |   | (34                               | )      | (1,025                          | )      | (1,608 | ) | (3,960 | ) |
| Income tax expense (benefit)                                                      |   | 85                                |   | (480                            | )      | (480 | ) | (850 | ) |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Net loss                                                                          |   | $                                 | (119   | )                               | $      | (545 | ) | $ | (1,128 | ) | $ | (3,110 | ) |
|                                                                              |   |                              |   |                            |   |   |   |   |   |
| Net loss per share:                                                               |   |                              |   |                            |   |   |   |   |   |
| Basic and diluted                                                                 |   | $                                 | (0.01  | )                               | $      | (0.05 | ) | $ | (0.11 | ) | $ | (0.31 | ) |
| Weighted average number of shares used in  the computation of net loss per share: |   |                              |   |                            |   |   |   |   |   |
| Basic and diluted                                                                 |   | 10,404                            |   | 10,356                          |   | 10,402 |   | 10,105 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 
|                                                                             |         | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------------------------|--------------|---------------------------------|--------|
|                                                                             |         | **2003**                        |   | **2002** |   |
| Cash flows from operating activities:                                            |         |                            |   |   |   |
| Net loss                                                                         |         | $                               | (1,128 | ) | $ | (3,110 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |         |                            |   |   |   |
| Depreciation and amortization                                                    |         | 2,094                           |   | 1,477 |   |
| Inventory provisions                                                             |         | (35                             | )      | 170 |   |
| Amortization of deferred stock compensation                                      |         | 87                              |   | 276 |   |
| Amortization of investment premium                                               |         | 14                              |   | 77 |   |
| Deferred gain on sale-leaseback                                                  |         | (8                              | )      | (9 | ) |
| Non-cash charge for in-process research  & development                       |         | —                          |   | 2,108 |   |
| Changes in operating assets and liabilities,  net of effects of acquisitions:    |         |                            |   |   |   |
| Accounts receivable                                                              |         | (414                            | )      | (1,267 | ) |
| Inventories                                                                      |         | (632                            | )      | 1,523 |   |
| Prepaid expenses and other assets                                                |         | (86                             | )      | 1,570 |   |
| Accounts payable and accrued expenses                                            |         | 645                             |   | 155 |   |
|                                                                             |         |                            |   |   |   |
| Net cash provided by operating activities                                        |         | 537                             |   | 2,970 |   |
|                                                                             |         |                            |   |   |   |
| Cash flows from investing activities:                                            |         |                            |   |   |   |
| Purchases of available-for-sale securities                                       |         | (1,000                          | )      | (4,480 | ) |
| Proceeds from sale of available-for-sale  securities                             |         | 5,683                           |   | 15,066 |   |
| Payment for acquisitions, net of cash  acquired                                  |         | —                          |   | (26,569 | ) |
| Proceeds from sale of property and  equipment                                    |         | 97                              |   | 72 |   |
| Purchase of property and equipment                                               |         | (1,121                          | )      | (1,013 | ) |
|                                                                             |         |                            |   |   |   |
| Net cash (used) provided by investing  activities                                |         | 3,659                           |   | (16,924 | ) |
|                                                                             |         |                            |   |   |   |
| Cash flows from financing activities:                                            |         |                            |   |   |   |
| Payments on capital lease obligations                                            |         | (41                             | )      | (36 | ) |
| Proceeds from exercise of stock options                                          |         | 17                              |   | 342 |   |
|                                                                             |         |                            |   |   |   |
| Net cash (used) provided by financing  activities                                |         | (24                             | )      | 306 |   |
|                                                                             |         |                            |   |   |   |
| Effects of exchange rate changes on cash                                         |         | 4                               |   | 4 |   |
|                                                                             |         |                            |   |   |   |
| Net change in cash and cash equivalents                                          |         | 4,176                           |   | (13,644 | ) |
| Cash and cash equivalents at beginning of  period                                |         | 6,708                           |   | 16,102 |   |
|                                                                             |         |                            |   |   |   |
| Cash and cash equivalents at end of period                                       |         | $                               | 10,884 |   | $ | 2,458 |   |
|                                                                             |         |                            |   |   |   |
| Supplemental disclosure of cash flow information:                                |         |                            |   |   |   |
| Cash received (paid) during the period  for:                                | Interest     |                            | $      | (25 | ) | $ | (38 | ) |
|                                                                             | Income taxes |                            | 218    |   | 1,395 |   |
|                                                                             |         |                            |   |   |   |
| Supplemental disclosure of noncash  activities:                                  |         |                            |   |   |   |
| Unrealized gain (loss) on short-term and  long-term investments                  |         | $                               | (2     | ) | $ | (42 | ) |
| Issuance of stock and options for  acquisition of business                       |         | —                          |   | 20,313 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

5

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**NOTES TO CONSOLID****ATED FINANCIALSTATEMENTS**

**(Inthousands, except share amounts)**

**(unaudited)**

 

**Note 1. Basis of Presentation**

 

Theaccompanying unaudited consolidated financial statements include normalrecurring adjustments necessary for a fair presentation of Advanced PowerTechnology, Inc.’s (APT) interim results. The consolidated financial statements and notes in this Form 10-Q arepresented as permitted by Regulation S-X, and as such, they do not containcertain information included in APT’s 2002 annual consolidated financial statementsand notes.  This Form 10-Q should beread in conjunction with APT’s consolidated financial statements and notesincluded in its Annual Report on Form 10-K for the year ended December 31,2002.  The financial information as ofDecember 31, 2002 is derived from the audited consolidated financial statementsas filed with APT’s Annual Report on Form 10-K for the year ended December 31,2002.  The results of operations for thethree and six months ended June 30, 2003 are not necessarily indicative of the resultsexpected for the entire fiscal year ending December 31, 2003.

 

APT’sfinancial quarters are 13 week periods. The second quarter of 2003 ended onJune 29 and the second quarter of 2002 ended on June 30.  For convenience, the second quarters of 2003and 2002 are both shown as ended on June 30.

 

**Note 2. Summary of Significant AccountingPolicies**

 

***(a) Revenue Recognition, Sales Returns andAllowances***

 

The balances and changes in reserve for warranties and sales returnsfor the three and six months ended June 30, 2003 and 2002 are as follows:

 
|                                      |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                      |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                      |   |                              |   |                            |   |   |   |   |   |
| Balance – beginning of period        |   | $                                 | 289    |                            | $      | 519 |   | $ | 351 |   | $ | 365 |   |
| Fair value of acquisition related balance |   | —                            |   | 75                              |   | — |   | 133 |   |
| Provisions                                |   | 337                               |   | 304                             |   | 581 |   | 591 |   |
| Charge offs                               |   | (251                              | )      | (378                            | )      | (557 | ) | (569 | ) |
| Balance – end of period              |   | $                                 | 375    |                            | $      | 520 |   | $ | 375 |   | $ | 520 |   |

 

***(b) Stock-Based Compensation***

 

APT has elected to continue to apply the prescribed accounting inOpinion 25 and provide the required disclosures per SFAS 123 and SFAS 148. APTaccounts for equity instruments issued to non-employees in accordance with theprovisions of SFAS 123 and Emerging Issues Task Force consensus on IssueNo. 96-18, “Accounting for Equity Instruments that are Issued to Other thanEmployees, for Acquiring or in Conjunction with Selling Goods or Services.”

 

6

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Had APT determined compensation cost based on the fair value at thegrant date for its stock options under SFAS 123, APT’s net loss would havebeen the pro forma amounts indicated in the table below.

 
|                                                                                                                  |   | **Three  Months  Ended June 30,** |   | **Six  Months  Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                                  |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                                                                  |   |                              |   |                            |   |   |   |   |   |
| Net loss:                                                                                                             |   |                              |   |                            |   |   |   |   |   |
| As reported                                                                                                           |   | $                                 | (119   | )                               | $      | (545 | ) | $ | (1,128 | ) | $ | (3,110 | ) |
| Add: Stock based compensation included in  reported net loss, net of related tax effects                              |   | 40                                |   | 130                             |   | 88 |   | 276 |   |
| Deduct: Stock based compensation determined  under fair value based method for all awards, net of related tax effects |   | (440                              | )      | (568                            | )      | (879 | ) | (1,122 | ) |
| Pro forma net loss                                                                                                    |   | $                                 | (519   | )                               | $      | (983 | ) | $ | (1,919 | ) | $ | (3,956 | ) |
|                                                                                                                  |   |                              |   |                            |   |   |   |   |   |
| Loss per share:                                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Basic and diluted – as reported                                                                                  |   | $                                 | (0.01  | )                               | $      | (0.05 | ) | $ | (0.11 | ) | $ | (0.31 | ) |
| Basic and diluted – pro forma                                                                                    |   | $                                 | (0.05  | )                               | $      | (0.10 | ) | $ | (0.18 | ) | $ | (0.39 | ) |

 

The effects of applying SFAS 123 in this pro forma disclosure are notindicative of future amounts and additional awards are anticipated in futureyears.

 

The fair value of the compensation costs reflected in the above proforma amounts was determined using the Black-Scholes option pricing model andthe weighted average assumptions as follows:

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |
| Risk-free interest rate |   | 2.6-2.9  | %      | 3.8      | %      |
| Expected dividend yield |   | 0        | %      | 0        | %      |
| Expected life           |   | 5 years  |   | 5 years  |   |
| Volatility              |   | 100      | %      | 100      | %      |

 

***(c) Net Income (Loss) Per Share***

 

Basic netincome (loss) per share is computed using the weighted average number of sharesof common stock outstanding for the period. Diluted net income per share iscomputed using the weighted average number of shares of common stock anddilutive potential common shares related to stock options and warrantsoutstanding during the period. Anti-dilutive potential common shares are excluded from the diluted netincome share calculation.  Dilutive netloss per share excludes all potential common shares from the calculation as theimpact would be anti-dilutive.

 

7

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There were noincremental dilutive shares included in the calculation of diluted net loss pershare because the impact would be anti-dilutive. Incremental anti-dilutiveshares that were excluded from the calculation of diluted net loss per sharefor the three and six months ended June 30, 2003 and 2002 are summarized in thefollowing table.

 
|                                                                       |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |       |
|----------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|------------|
|                                                                       |   | **2003**                          |   | **2002**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                       |   |                              |   |                            |       |   |   |   |   |
| Anti-dilutive shares excluded from diluted  net loss per share calculation |   | 1,233,000                         |   | 852,000                         |       | 1,205,000 |   | 906,000 |   |

 

**Note3. Comprehensive Income (loss)**

 

Comprehensiveincome (loss) is the total of net income (loss) and all other non-owner changesin equity. Comprehensive income (loss) includes foreign currency translations and unrealized gains and lossesfrom investments, as presented in the following table.

 
|                                              |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                              |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                              |   |                              |   |                            |   |   |   |   |   |
| Net loss                                          |   | $                                 | (119   | )                               | $      | (545 | ) | $ | (1,128 | ) | $ | (3,110 | ) |
|                                              |   |                              |   |                            |   |   |   |   |   |
| Other comprehensive income (loss), net of  tax:   |   |                              |   |                            |   |   |   |   |   |
| Unrealized loss on available for sale  securities |   | —                            |   | (7                              | )      | (2 | ) | (42 | ) |
| Foreign currency translation adjustment           |   | 49                                |   | 111                             |   | 74 |   | 102 |   |
| Comprehensive loss                                |   | $                                 | (70    | )                               | $      | (441 | ) | $ | (1,056 | ) | $ | (3,050 | ) |

 

**Note 4. Inventories, net**

 

|              |   | **June 30,  2003** |   | **December  31,  2002** |   |
|-------------------|--------|--------------------|--------|-------------------------|--------|
|              |   |               |   |                    |   |
| Raw materials     |   | $                  | 3,095  |                    | $      | 2,806 |   |
| Work in process   |   | 6,811              |   | 6,705                   |   |
| Finished goods    |   | 4,425              |   | 4,128                   |   |
|              |   | 14,331             |   | 13,639                  |   |
| Valuation reserve |   | (1,632             | )      | (1,690                  | )      |
|              |   | $                  | 12,699 |                    | $      | 11,949 |   |

 

**Note5. Acquisitions**

 

***(a) GHz Technology,Inc.***

 

OnJanuary 25, 2002, APT acquired all of the outstanding shares and stockoptions of GHz Technology, Inc. (GHz), in exchange for cash, APT common stock,and APT stock options.  The company wasrenamed Advanced Power Technology RF, Inc. (APTRF).  The GHz assets acquired included approximately $205 in cash and$7,656 in marketable securities.  Thetransaction was accounted for by the purchase method of accounting, inaccordance with SFAS 141, “Business Combinations” and SFAS 142.  APT obtained a third party valuation studyto estimate the fair

 

8

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value of the acquiredintangible assets.  APT began toconsolidate the financial results of GHz on January 25, 2002 and forward.

 

***(b)******                              MicrosemiRF Products, Inc.***

 

On May 24,2002, APT acquired the product lines and certain assets of Microsemi RFProducts, Inc. (MSC RF), a wholly-owned subsidiary of Microsemi Corporation,for $12,200 in cash.  The company wasrenamed Advanced Power Technology RF Pennsylvania, Inc. (APTRF-PA).  The transaction was accounted for by thepurchase method of accounting, in accordance with SFAS 141 and SFAS 142. APTobtained a third party valuation study to estimate the fair value of theacquired intangible assets.  APT beganto consolidate the financial results of the acquired business on May 24, 2002and forward

 

***(c)******                               ProForma Condensed Consolidated Results***

 

The followingtable reflects the unaudited combined results of APT, GHz, and MSC RF as if theacquisitions had taken place as of January 1, 2002.  The pro forma information includes non-cash charges foramortization of technology rights, inventory fair value adjustments,depreciation and deferred compensation related to the acquisitions, consistentwith generally accepted accounting principles. The period excludes a charge of $1,897 for in-process research anddevelopment expense.  The pro formainformation does not necessarily reflect the actual results that would haveoccurred if the companies had been combined during the period nor is itnecessarily indicative of future results of operations for the combinedcompanies.

 

|                                                                              |   | **Three  Months  Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------------|--------|------------------------------------|--------|---------------------------------|--------|
|                                                                              |   | **2002**                           |   | **2002**                        |   |
|                                                                              |   |                               |   |                            |   |
| Revenues, net                                                                     |   | $                                  | 12,034 |                            | $      | 23,067 |   |
| Net loss                                                                          |   | (546                               | )      | (1,871                          | )      |
|                                                                              |   |                               |   |                            |   |
| Net loss per share:                                                               |   |                               |   |                            |   |
| Basic and diluted                                                                 |   | $                                  | (0.05  | )                               | $      | (0.18 | ) |
| Weighted average number of shares used in  the computation of net loss per share: |   |                               |   |                            |   |
| Basic and diluted                                                                 |   | 10,356                             |   | 10,314                          |   |

 

**Note 8. SEGMENT INFORMATION**

 

APT operatesin one segment and is engaged in the manufacture and marketing ofhigh-performance power semiconductors and modules for switching and RFapplications.

 

**Note 9. COMMITMENTS AND CONTINGENCIES**

 

From time totime the Company is involved in various legal matters that arise out of theordinary conduct of its business, including those related to litigation overintellectual property rights, commercial transactions, contracts andenvironmental matters.  The Company iscurrently involved in various legal proceedings.  The Company does not believe that the ultimate resolution of suchlitigation will have a material adverse effect on the Company’s financialposition, results of operations or cash flows. However, the length of time and legal fees associated with the patentlitigation with IXYS may be significant. The Company accrues loss contingenciesin connection with its litigation when it is probable that a loss has occurredand the amount of the loss can be reasonably estimated.

 

9

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**ITEM 2. MANAGEM****ENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thisdiscussion and analysis is intended to be read in conjunction with Management’sDiscussion and Analysis of Financial Condition and Results of Operations setforth in our Annual Report on Form 10-K for the year ended December 31, 2002.

 

**Forward-lookingStatements and Risk Factors Affecting Business and Results of Operations**

 

All statementsand trend analyses contained in this item and elsewhere in this report onForm 10-Q relative to the future constitute “forward-looking” statementswithin the meaning of the Private Securities Litigation Reform Act of 1995.Forward-statements are subject to the business and economic risks faced by usand our actual results of operations may differ materially from those containedin the forward-looking statements. In addition, results of operations for theperiods discussed below should not be considered indicative of the results tobe expected in any future period and fluctuations in operating results might resultin fluctuations in the market price of our common stock. Our quarterly andannual operating results may vary significantly depending on many factors,including but not limited to the ability of subcontractors to meet theirdelivery commitments; unfavorable changes in industry and competitiveconditions; our mix of product shipments; the accuracy of our customer’sforecasts; the effectiveness of our efforts to control and reduce costs; thecost and liability associated with patent infringement litigation; and otherrisks detailed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Risk Factors Affecting Business and Results ofOperations” in our Annual Report on Form 10-K for the year ended December 31,2002, filed with the Securities and Exchange Commission.

 

**Overview**

 

We are a leading designer, manufacturer and marketer ofhigh-performance power semiconductors and modules for both switching and RFapplications. Power semiconductors manage and regulate electrical power byconverting electricity into a form required by electrical and electronicproducts. Our power semiconductors increase system efficiency, permit thedesign of more compact end products and improve features and functionality. Weare primarily focused on the high power, high frequency segment of the powersemiconductor market. High power refers to the ability to dissipate above onekilowatt, and high frequency refers to the ability to switch on and off atrates above 100 kilohertz. In addition we have strengthened our portfolio of RFproducts that operate at frequencies ranging from 1 megahertz to 100 megahertz.RF generally refers to the ability to operate at frequencies above 1 megahertz.We sell our products primarily in North America, Europe, and Asia, through anetwork of independent sales representatives and distributors. Our common stockis listed on the Nasdaq National Market under the symbol APTI.

 

To further our penetration in RF markets, we completed the acquisitionof GHz Technology, Inc. and the business of Microsemi RF Products, Inc. inJanuary 2002 and May 2002, respectively. These acquisitions are part of the Company’s ongoing strategy to expandits product and technology portfolio in the RF power arena through bothinternal development and acquisitions. We believe that these acquisitions serve to position APT as an emerging,dominant supplier in bipolar RF power transistors for avionics, radar andnon-cellular communications applications. These acquisitions have added valuable RF technology and substantial RFengineering, manufacturing and marketing capability to the Company.

 

The following discussion should be read in conjunction with theconsolidated financial statements provided under Part II, Item 8 of ourAnnual Report on Form 10-K. Certain statements contained herein mayconstitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements involve a number ofrisks, uncertainties and other factors that could cause actual results todiffer materially, as discussed more fully herein.

 

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**Critical Accounting Policies and Estimates**

 

Advanced Power Technology’s discussion and analysis of its financialcondition and results of operations are based upon consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires APT to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities. On an on-going basis, APTevaluates its estimates, including those related to product returns andwarranty obligations, allowance for doubtful accounts, excess and obsoleteinventories, income taxes, valuation of intangible assets including goodwill,valuation of long-lived assets, contingencies and litigation, and excesscomponent order cancellation costs. APT bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

 

APT believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements.

 

***Product Returns andWarranty Obligations***

 

Product revenue is recognized upon shipment of product. In general, APTprovides for a one-year repair or replacement warranty on its products. Uponshipment, APT provides for the estimated cost that may be incurred for productwarranty and sales returns based on historical experience. APT uses independentdistributors to sell some of its products. Distributors can return up to 5% ofthe dollar value of products purchased during the prior six months and receivecertain price protections on purchased products. Sales to distributors arerecognized upon shipment, less an allowance for estimated returns based onhistorical experience.

 

While the Company engages in extensive product quality programs andprocesses, including actively monitoring and evaluating the quality of itscomponent suppliers, APT’s warranty obligation is affected by productnon-conformance rates, material usage and service delivery costs incurred incorrecting a product non-conformance. Should actual product non-conformancerates, material usage, service delivery costs, or distributor returns differfrom APT’s estimates, revisions to the estimated warranty liability would berequired.

 

***Allowance forDoubtful Accounts***

 

APT maintains an allowance for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments.Management regularly reviews the adequacy of the allowance after consideringthe size of the accounts receivable balance, historical bad debts, thecustomer’s expected ability to pay and our collection history with eachcustomer. Management reviews significant individual accounts that are past dueto determine whether an allowance should be made based on these factors.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

***Excess and ObsoleteInventories***

 

*** ***Inventories arestated at the lower of standard cost (approximates actual cost on a first-in,first-out basis) or market (net realizable value).  APT establishes reserves for estimated unmarketable (excess) orobsolete inventory equal to the difference between the cost of inventory andthe estimated net realizable value based upon assumptions about future demandand market conditions. APT evaluates historical usage of the product, currentcustomer demand, and forecasted usage of the product.  If actual market conditions are less favorable than thoseprojected by management, additional inventory reserves may be required.

 

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***Income Taxes***

 

APT records a valuation allowance to reduce its deferred tax assets tothe amount that is more likely than not to be realized. While APT considersfuture taxable income and ongoing prudent and feasible tax planning strategiesin assessing the need for the valuation allowance, in the event APT were todetermine that it would be able to realize its deferred tax assets in thefuture in excess of its net recorded amount, an adjustment to the deferred taxasset would increase income in the period such determination was made.Likewise, should APT determine that it would not be able to realize all or partof its net deferred tax asset in the future, an adjustment to the deferred taxasset would be charged to income in the period such determination was made.

 

***Valuation ofGoodwill and Intangible Assets with Indefinite Lives***

 

APT values goodwill and intangible assets with indefinite lives inaccordance with Statement of Financial Accounting Standards No. (SFAS) 142“Goodwill and Other Intangible Assets.” Currently APT carries a goodwill balance in connection with acquisitionsmade in 2002, but has no other intangible assets with indefinite lives.  We annually review goodwill and otherintangible assets that have indefinite lives for impairment and when events orcircumstances indicate the carrying value of these assets might exceed theircurrent fair values. We determine fair value using discounted cash flowanalysis and other acceptable valuation methodologies, which requires us tomake certain assumptions and estimates regarding industry economic factors andfuture profitability.  It is our policyto conduct impairment testing based on our most current business plans, whichreflect changes we anticipate in the economy and industry.  If actual results are not consistent withour assumptions and judgments, we could be exposed to a material impairmentcharge as a result of writing down the carrying value of goodwill or intangibleassets with indefinite lives.

 

***Valuation ofLong-Lived Assets***

 

APT values goodwill and intangible assets with indefinite lives inaccordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-LivedAssets.” We evaluate our long-lived assets for impairment whenever events orchanges in circumstances indicate that the carrying amount may not berecoverable.  We determine the potentialimpairment using undiscounted cash flow analysis, which requires us to makecertain assumptions and estimates regarding industry economic factors andfuture profitability.  It is our policyto conduct impairment testing based on our most current business plans, whichreflect changes we anticipate in the economy and industry.  If actual results are not consistent withour assumptions and judgments, we could be exposed to a material impairmentcharge, as a result of writing down the carrying value of intangible assets.

 

***Contingencies andLitigation***

 

APT is subject to the possibility of various loss contingencies arisingin the ordinary course of business.  Weconsider the likelihood of loss or impairment of an asset or the incurrence ofa liability, as well as our ability to reasonably estimate the amount of lossin determining loss contingencies.  Anestimated loss contingency is accrued when it is probable that an asset hasbeen impaired or a liability has been incurred and the amount of loss can bereasonably estimated.  We regularlyevaluate current information available to us to determine whether such accrualsshould be adjusted.

 

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**Resultsof Operations**

 

The followingtable presents our consolidated statement of operations data for the periodsindicated as a percentage of net revenue:

 
|                                                 |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                 |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Revenues, net                                        |   | 100.0                             | %      | 100.0                           | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                                   |   | 62.3                              |   | 66.1                            |   | 65.7 |   | 67.0 |   |
| Amortization of technology rights and other  charges |   | 2.2                               |   | 5.3                             |   | 2.4 |   | 5.1 |   |
| Total cost of goods sold                             |   | 64.5                              |   | 71.4                            |   | 68.1 |   | 72.1 |   |
| Gross profit                                         |   | 35.5                              |   | 28.6                            |   | 31.9 |   | 27.9 |   |
| Operating expenses:                                  |   |                              |   |                            |   |   |   |   |   |
| Research and development                             |   | 5.3                               |   | 9.0                             |   | 6.3 |   | 10.5 |   |
| Selling, general and administrative                  |   | 29.7                              |   | 28.3                            |   | 32.3 |   | 29.2 |   |
| In-process research and development                  |   | —                            |   | 2.0                             |   | — |   | 11.1 |   |
| Total operating expenses                             |   | 35.0                              |   | 39.3                            |   | 38.6 |   | 50.8 |   |
| Income (loss) from operations                        |   | 0.5                               |   | (10.7                           | )      | (6.7 | ) | (22.9 | ) |
| Interest income and other expense, net               |   | (0.8                              | )      | 1.1                             |   | (0.1 | ) | 2.0 |   |
| Loss before income tax expense (benefit)             |   | (0.3                              | )      | (9.6                            | )      | (6.8 | ) | (20.9 | ) |
| Income tax expense (benefit)                         |   | 0.7                               |   | (4.5                            | )      | (2.0 | ) | (4.5 | ) |
| Net loss                                             |   | (1.0                              | )%     | (5.1                            | )%     | (4.8 | )% | (16.4 | )% |

 

*Revenues.*  Revenues for the second quarter of 2003 were$12.5 million, up 16.8% from $10.7 million in the second quarter of 2002.Excluding the acquisition of the business of Microsemi RF Products Inc., whichwas completed on May 24, 2002, second quarter 2003 revenues were up 7.3% overthe year ago quarter.  On a beforeacquisition basis, the increase in revenues over the prior year quarter isprimarily attributable to higher sales to the industrial/medical due to our MRIand implantable business and military/aerospace markets due to our products forcommercial aviations systems in Europe and the U.S.

 

Revenues forthe first six months of 2003 were $23.6 million, up 24.9% from $18.9 million inthe first six months of 2002.  Excludingthe acquisition of the business of Microsemi RF Products Inc., which wascompleted on May 24, 2002, revenues increased by 10.7%.  The increase over the prior year six monthsis attributable to stronger sales across each of the markets that we serve.

 

Sales todistributors were approximately 25% of revenues in the second quarter of 2003,compared to 21% for the total year 2002. We monitor inventory levels at our distributors on a monthly basis.  Sales of our higher margin RF productsrepresented approximately 52% in the second quarter of 2003 compared to 45% inthe second quarter of 2002.

 

*Gross Profit.*  Gross profit for the second quarter of 2003was 35.5% compared to 28.6% in the second quarter of 2002. Excludingacquisition related non-cash purchase accounting adjustments for the fair valueof inventory acquired and the amortization of the technology rights asset,gross profit was 37.7% for the second quarter of 2003 compared to 33.9% in thesecond quarter of 2002 and 30.5% in the first quarter of 2003.  The improvement in our gross profit margin overthe year ago quarter and the prior quarter is due to: higher fixed costabsorption at both our Bend, Oregon and Santa Clara, California facilities; agreater percentage of higher margin RF products in our second quarter 2003revenues; and the benefit of cost reduction initiatives we have undertakenincluding the reduction of personnel costs, controlled discretionary spending,and reduction of facilities related charges.

 

Gross profitmargin for the six months of 2003 was 31.9% compared to 27.9% in the first sixmonths of 2002. Excluding the acquisition related purchase accountingadjustments for the fair value of inventory acquired and the amortization ofthe technology rights asset, gross profit was 34.3% for the first six months of2003 compared to

 

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33.0% for the first six monthsof 2002. The increase in gross profit margin is primarily due to the higher RFproduct content of our sales mix in 2003 versus 2002.  Overall factory utilization was improved at our Bend, Oregon andSanta Clara, California facilities in the period, but was partially offset bythe low fixed cost absorption at our Montgomeryville, Pennsylvania operationwhich we acquired May 24, 2002.  Inorder to reduce our production costs, the company is implementing aconsolidation of the Pennsylvania wafer fab operations to our Bend, Oregonfacility as well as programs to greater utilize lower cost offshore assemblysubcontractors with corresponding downsizing of internal assembly operations.

 

*Research and Development Expense.*  Second quarter of 2003 research anddevelopment expenses were $668,000 or 5.3% of revenues, compared to $960,000 inthe second quarter of 2002, or 9.0% of revenues.  Research and development expenses in the first six months of 2003and 2002 were $1.5 million and $2.0 million or 6.3% and 10.5% of revenues,respectively.  The decrease in secondquarter spending over the prior year quarter is primarily due to lowerexpenditures for supplies and materials. Spending in the first quarter of 2003was higher due to supporting the introduction of a number of new products,especially for our Power MOS7® technology. The Company plans to continue itsresearch and development programs leading to the introduction of new productsfor use in both switching and RF applications. The decrease in the percentageof revenue is also due to our higher revenue levels in 2003.

 

*Selling, General and Administrative Expense.*  Second quarter of 2003 selling, general, andadministrative expenses were $3.7 million or 29.7% of revenues, compared to$3.0 million in the second quarter of 2002, or 28.3% of revenues.  Selling, general, and administrativeexpenses in the first six months of 2003 and 2002 was $7.6 million and $5.5million or 32.3% and 29.2% of revenues, respectively.  The increase in expenses over the prior year quarter isattributable to higher payroll costs as a result of the discontinuance of thegraduated pay reductions we implemented in 2001 and the first half of 2002, aswell as additional personnel in selling, general and administrative functionsdue to new hires and to transferring of job functions from other functionalareas of the Company.  In addition wehad increased legal expenses in connection with the ongoing patent litigation,as more fully explained in Part II, Item 1 to this filing. We have deniedinfringement of the IXYS patents and have asserted affirmative defenses to ourclaims.  However, the length of time andlegal fees associated with the patent litigation with IXYS may be significant.The increase in expenses for the first six months of 2003 over the first sixmonths of 2002 is attributable to the same reasons as above and to theincremental spending at the subsidiaries we acquired at the end of January andMay of 2002, including a $240,000 severance charge in the first quarter of 2003due to an organizational restructuring.

 

*Interest income and o**therexpense, net*.  Interestincome and other expense, net, which includes interest income, interest expenseand other expense, was a net expense of $93,000 in the second quarter of 2003compared to a net income of $114,000 in the second quarter of 2002.  The primary component is interest incomeearned on our cash and marketable securities. Net interest income was $52,000 in the second quarter of 2003 comparedto $162,000 in the second quarter of 2002. The decline in interest income is primarily due to lower interest ratesavailable in the current investment market and a lower investment balance dueto cash used for the acquisitions we made in 2002.  The net expense of $145,000 incurred in the second quarter of2003 includes $102,000 of estimated accrued cost related to a small fire at ourMontgomeryville, Pennsylvania facility. We have insurance which covers this type of damage and expect to recovermost of the accrued loss through our insurance claims proceeds. This will berecorded as a gain at the time of the receipt of any insurance proceeds.

 

*Income Tax Expense (Benefit)*.  We recorded a tax expense in the secondquarter of 2003 of $85,000 on a loss before tax of $34,000 for a negative 250%effective tax rate.  The reason for therecording of a tax expense on a net loss is due to the mix of our profit (loss)before tax between United States (U.S.) and foreign tax jurisdictions.  We recorded a profit before tax within theU.S. and a loss outside of the U.S.  Inaddition, due to loss carry forward positions outside of the U.S., we have notrecorded any additional tax benefit for the foreign loss incurred, as werecorded an increase in our valuation allowance for the tax effect of theforeign loss.  Our effective tax ratefor the first six months of 2003 is 29.9%, which is lower than the statutoryrate also due to the mix of our profit (loss) before tax between the U.S. andforeign jurisdictions.  We recorded atax benefit of $480,000 in the second quarter of 2002, at an effective tax rateof 46.8%.  The effective tax rate in thefirst six months of 2002 was approximately 21.5%. The second quarter and yearto date tax rate benefit in 2002 is greater than the expected tax rate benefitprimarily due

 

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to the benefit of a reductionin the valuation allowance due to the realization of foreign net operating losscarry forwards.

 

*Valuation of Goodwill and Intangible Assets with Finite Lives*.Consistent with GAAP, goodwill and intangible assets are carried on theCompany’s balance sheet at fair value at acquisition and reviewed at leastannually for impairment or when other indications of potential impairment arepresent.  Due to recent stock market andeconomic conditions, the Company performed an interim impairment analysis inthe second quarter of 2003. The results of this analysis indicated that as ofJune 30, 2003 there was no impairment to the Company’s goodwill or intangible assets.The Company will continue to monitor the balance of our goodwill and intangibleassets and assess the amounts for impairment at least on an annual basis.

 

**Liquidityand Capital Resources**

 

In the firstsix months of 2003, we generated approximately $537,000 from operatingactivities.  This primarily resultedfrom our net loss of $1.1 million and a negative cash flow from operatingassets and liabilities of $488,000, offset by non-cash charges for depreciationand amortization of $2.2 million.

 

In the firstsix months of 2003, we generated $3.7 million from investing activities, whichconsisted mainly of net proceeds from the sale of available-for-sale securitiesof $4.7 million, offset by purchases of $1.1 million of fixed assets.  Our purchases of fixed assets were fortechnology infrastructure and facility and equipment expenditures at our Bendfacility in support of the consolidation of wafer fab operations from ourPennsylvania facility to Bend.

 

In the firstsix months of 2003, we used approximately $24,000 in financing activities,which primarily consisted of the payment of capital lease obligations of$41,000 offset by the net proceeds of $17,000 from the exercise of stockoptions.

 

As of June 30,2003 APT had $34.5 million in working capital. Our trade accounts receivable balance was $7.4 million reflecting a dayssales outstanding ratio of 53 days, compared to trade accounts receivable of$6.9 million at December 31, 2002, reflecting a days sales outstanding ratio of63 days.  Our inventory balance was$12.7 million reflecting inventory turns of 2.6 times per year, compared to aninventory balance of $11.9 million at December 31, 2002, reflecting inventoryturns of 2.8 times per year. The calculations above are based on quarterlyaverage balances of trade accounts receivable and inventory and annualizedquarterly sales and cost of goods sold.

 

APT currentlyexpects to fund expenditures for capital requirements as well as liquidityneeds from a combination of available cash balances, internally generated fundsand financing arrangements if needed. As of June 30, 2003, APT had$18.6 million in cash and cash equivalents and available-for-salesecurities. APT’s investment policy is to invest in short term, high-gradeliquid investments with the goal of capital preservation. APT’s ability togenerate positive cash flow from operations may be affected by marketconditions as well as other risk factors as described in our Annual Report onForm 10-K for the year ended December 31, 2002. We expect from time to time toevaluate potential acquisitions and equity investments complementary to ourmarket strategy. To the extent we pursue such transactions, we could requireadditional equity or debt financing to fund such activities or to fund ourworking capital requirements in the event of an industry downturn or anunexpected adverse change in our business operations. To the extent we requireadditional capital, we cannot assure you that we will be able to obtain suchfinancing on terms favorable to us, or at all.

 

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**RecentAccounting Pronouncements**

 

In June 2002,the FASB issued SFAS 146 - “Accounting for Costs Associated with Exit orDisposal Activities.” SFAS 146 addresses accounting and reporting for costs associatedwith exit or disposal activities and nullifies Emerging Issues Task Force IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (Including Certain Costs Incurred in aRestructuring).” SFAS 146 requires that a liability for a cost associated withan exit or disposal activity be recognized and measured initially at fair valuewhen the liability is incurred. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002, with early applicationencouraged.  The adoption of the newrule is not expected to have a material impact on the Company’s statements ofposition, operations or cash flows.

 

In November,2002, the FASB issued FASB Interpretation No. 45 - “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (“FIN 45”). This interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issuedand requires that they be recorded at fair value. The initial recognition andmeasurement provisions of this interpretation are to be applied only on aprospective basis to guarantees issued or modified after December 31, 2002. Thedisclosure requirements of this interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002. Theadoption of the new rule is not expected to have a material impact on theCompany’s statements of position, operations or cash flows.

 

**ITEM 3. QUANTIT****ATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

We do not use derivative financial instruments in our investmentportfolio. Due to the short duration and conservative nature of our cashequivalents, and the high quality and conservative nature of our long-terminvestments, we do not expect any material loss with respect to our investmentportfolio.

 

Currently less than 2% of our sales are transacted in local currencies,primarily Euros. As a result, our international results of operations havelimited exposure to foreign exchange rate fluctuations. We do not currentlyhedge against foreign currency rate fluctuations. Most of our export sales andsales by APT Europe are in U.S. dollars, and most of our foreign currency salesare from operations with significant expenses in the same currency. As aresult, gains and losses from such fluctuations have not been material to ourconsolidated results of operations.

 

**ITEM 4. CONTRO****LS ANDPROCEDURES**

 

*(a) Evaluation of disclosure controls and procedures.*

 

As required by new Rule 13a-15 under the Securities Exchange Act of1934, the Company carried out an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, as ofthe end of the period covered by this report. Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms. In connection with the new rules, we currently are in theprocess of further reviewing and documenting our disclosure controls andprocedures, including our internal controls over financial reporting, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that our systems evolve with our business.

 

Based on our most recent evaluation of the effectiveness of the designand operation of the Company’s disclosure controls and procedures, the Companydid not discover:

 

(a) Any significant deficiencies or material weaknesses in the designor operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process,summarize and report financial information;

 

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(b) Any instances of fraud, whether or not material, that involvedmanagement or other employees who have a significant role in the registrant’sinternal control over financial reporting.

 

*(b) Changes in internal controls*

 

None.

 

**PART II.  OTHER****INFORMATION**

 

**ITEM 1. LEGA****L PROCEEDINGS**

 

On August 15, 2002, IXYS Corporation filed a patent infringementlawsuit against APT in the United States District Court, Northern District ofCalifornia.  The claim filed by IXYSalleges that APT infringes their United States Patent No. 5,486,715 and5,801,419.  The IXYS claim alsorequested that damages be determined at trial and that such damages be trebled.On October 1, 2002, APT filed its Answer to the IXYS allegations of patentinfringement setting forth several affirmative defenses related to the validityof the IXYS patents.  In addition, APTfiled a patent infringement counterclaim against IXYS, alleging that IXYSinfringes APT United States Patent No. 5,283,202, entitled “IGBT Device WithPlatinum Lifetime Control Having Gradient Or Profile Tailored PlatinumDiffusion Regions.”  In addition, APTdoes not believe that it infringes the IXYS patents cited in the claim.  APT plans to vigorously defend itself inthis lawsuit.

 

**ITEM 6. EXHIBIT****S AND REPORTS ON FORM 8-K**

 

(a) The exhibits filed as partof this report are listed below:

 

| **Exhibit No.** |   |                                                                                                                      |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                      |
| 31.1            |   | Rule13a-14(a)/15d-14(a)  Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.            |
|            |   |                                                                                                                      |
| 31.2            |   | Rule13a-14(a)/15d-14(a)  Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.            |
|            |   |                                                                                                                      |
| 32              |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

(b) Reports on Form 8-K

 
| **Date of Report** |   | **Date Filed**  |   | **Description**                                             |
|--------------------|--------|-----------------|--------|-------------------------------------------------------------|
|               |   |            |   |                                                        |
| April 23,  2003    |   | April 28,  2003 |   | Earnings  release for first quarter 2003 financial results. |

 

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**SIGNAT****URE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized this 11th day of August, 2003

 

 
|   |   | ADVANCED  POWER TECHNOLOGY, INC.                   |
|--------|--------|----------------------------------------------------|
|   |   |                                               |
|   |   |                                               |
|   |   | By:                                                | /s/ GREG M.  HAUGEN |   |
|   |   |                                               |
|   |   | Greg M.  Haugen                                    |
|   |   | Vice  President, Finance and Administration,       |
|   |   |   Chief  Financial Officer and Secretary |
|   |   | (Principal  Financial Officer)                     |

 

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